Sounds simple, doesn’t it? Then again, Warren Buffet has always had a knack for understanding the symmetry between price and value.
In many ways, one could apply this same adage on price and value when calculating the return on investment or Cloud ROI.
Today, the dynamic and evolving nature of cloud computing is presenting businesses with innovative ways to leverage value through a variety of delivery options (i.e., IaaS, PaaS or SaaS) while helping organizations gain price or cost savings through shifting capital expenditures (CAPEX) to operating expenses (OPEX).
When businesses are calculating the Cloud ROI, there are a number of tangible and intangible costs that should be considered in the total cost of investment.
By definition, ROI is a performance measurement used to evaluate the efficiency of an investment. In simple terms, the classic ROI calculation is:
For example, if a business makes an initial CAPEX investment of $600,000 over two years and gains benefit (cost savings + new revenue) of $750,000 during this same period, the ROI will generate a return of 25%. Done.
However, understanding the inherent costs, both tangible and intangible, when calculating Cloud ROI can help business leaders better understand the total cost of investment.
Capturing / measuring tangible costs can include:
- Shifting Cost from CAPEX to OPEX. Very simply, cloud services can shift your capital expenditure to an operational cost. In addition, other cost saving considerations should include reduced labor to run infrastructure and applications, licensing purchases and maintenance, technical support and user support, maintenance (upgrades, updates, patches, etc.), and data center hosting (building, power, cooling, etc.).
- Greater Speed in Provisioning. Customers gain access to and benefit from highly trained skills and capabilities to gain savings in labor and employment costs (onboarding, salary, benefits, training, etc.). This can translate to rapid installations to scale and avoid potentially costly downtime associated and enable faster productivity.
- Reliability. Redundant sites that can provide business continuity and disaster recovery in a more efficient manner.
- Scalability or Surge Capacity. Enterprises use only cloud resources as needed or pay-as-you-go, thus reducing idle assets
- Cost Benefit of Outsourcing. Can eliminate delays, facilitate quick decisions, and enhance transitioning to new applications that can free businesses to focus more on research, market, and competitive initiatives that can ultimately result in greater revenue.
Stopping here can be misleading. There are many intangible costs or value that should be factored into your ROI calculation, including:
- Prevention of Lost Opportunity. Outsourcing to an IaaS, PaaS, or SaaS can potentially help land new business or expand into new markets. More importantly, it may help a business avoid losing an opportunity.
- Focus on Core Business. In-house IT resources can be re-deployed to support core business activities.
- Real-Time Collaboration. Real-time collaboration can enhance quality and innovation throughout your enterprise.
- Risk Sharing. The risk of managing security breaches, data loss, disaster recovery can be transferred and represent a tangible or intangible benefit.
- Employee Satisfaction. Greater and more-focused productivity, process improvement, competitive advantage, and increased market share all can result in immeasurable employee value.
In summary, there are many tangible and intangible features with cloud computing, and gaining an in-depth understanding of each of these factors will help when calculating Cloud ROI.
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About the Author
Kevin O’Hare, CFO, has been a successful financial leader at both public and private information and technology companies over the past 25 years.
Prior to joining AIS, Mr. O’Hare was the CFO at the private equity-backed 3E Company responsible for managing finances, sales operations, quality assurance, human resources and legal departments. The company was successfully sold to Verisk Analytics (VRSK) in 2010.